Financials in Focus on Friday

JPMorgan, Wells Fargo both headed to the earnings confessional

Of the 10 main sectors defined by Standard & Poor’s, the financial sector has been the top-performing sector so far this year. The ETF that represents the financial sector, the Financial Select Sector SPDR (NYSE:XLF),has gained 17.33% through Wednesday’s close. The XLF was the worst-performing sector in 2011, so it is interesting how it has gone from being a dog to being a darling in a few short months.

The sector will be in focus on Friday as J.P. Morgan (NYSE:JPM)and Wells Fargo (NYSE:WFC)are both set to announce earnings results before the market opens. Analysts expect JPM to earn $1.18 per share while WFC is expected to earn 73 cents per share. JPM’s earnings estimate has been revised upward in recent months while WFC’s has been constant.

The sentiment for the two companies is similar heading into the announcements. JPM has 32 analysts following it and 29 of the 32 rate the company as a “buy” while three rate it as a “hold.” For WFC, there are 33 analyst ratings with 24 rating it a “buy,” eight rating it a “hold” and one pegging the stock as a “sell”. Both companies have very low short-interest ratios with JPM’s standing at 0.90 and WFC’s coming in at 1.10.

Over the last four earnings releases, JPM has met or beat expectations each time. The reaction to the earnings release has been the same each time as well. The stock has fallen for a few days and has then reversed and moved higher in each case.

WFC hasn’t been as consistent with its earnings and the stock hasn’t been as consistent with its reaction, either. WFC beat estimates in January, but the company missed expectations back in October. The previous two earnings releases before October both beat expectations.

The reaction to the earnings has been for WFC stock to climb for 5-10 days, but then over the ensuing few weeks the stock has fallen below the level it was at before the earnings release. This has been the case in all four of the previous earnings releases.

With the sentiment towards each of these stocks so bullish, it seems as though it will be hard for the companies to surprise anyone on the upside. Regardless of what the results are, it is the reaction by investors that matters. And in the case of JPM and WFC, they have both shown distinct patterns in their reactions. Based on the past earnings reports, it seems the way to play these two financial companies — at least for conservative investors — is to wait until after the earnings are released.

As of this writing, Rick Pendergraft does not own any shares mentioned here.